Euribor and Central Bank Functions: Understanding Monetary Policy

Euribor and the Role of Central Banks

Euribor is the interest rate that the Bank of Spain has to pay to the European Central Bank for central bank money. A central bank is the institution charged with overseeing the financial system and regulating the amount of money in an economy.

Functions of a Central Bank

Its functions are:

1. To safeguard and manage foreign exchange and precious metals.
2. To supervise the functioning of credit institutions.
3. To control the proper functioning of the financial system.
4. To put currency into circulation.
5. To prepare and publish reports.
6. To act as the state's bank.
7. To advise the government.

The Bank of Spain

The Bank of Spain is the Spanish monetary authority that regulates the country's financial activities. It is a member of the European System of Central Banks (ESCB). It does not follow the government's instructions when setting monetary policy but follows the guidelines of the European Central Bank, whose function is price stability.

Functions of the ESCB

As members of the ESCB, their functions are:

1. To define and execute the monetary policy of the Eurozone.
2. To manage the foreign exchange reserves and conduct foreign exchange operations.
3. To promote the proper functioning of the payment system.
4. To authorize the issuance of banknotes.

Understanding a Central Bank's Balance Sheet

Assets

Assets represent the property and rights of recovery, i.e., what the bank owns. The main asset items are:

1. Gold and Foreign Currencies: Foreign exchange holdings and other assets that a country has and that can be used to satisfy the demands of the banking system for foreign currencies.
2. Credits: Loans to banks at the official interest rate.
3. Open Market Operations: Purchases and sales of public securities by the ECB to reduce or increase the quantity of money.

Liabilities

Liabilities represent payment obligations, i.e., what the bank owes. Liabilities equal the monetary base. The main liability items are:

• Cash in the hands of the public.
• Central bank reserves.
• Non-monetary liabilities.

The Money Multiplier

The money multiplier indicates how much the amount of money varies for each variation in the monetary base. It is equal to the inverse of the reserve ratio. The money supply depends on the policies of the central bank, controlled by setting reserve requirements and, above all, open market operations.

Monetary Policy

Monetary policy refers to the decisions made by the central bank to modify the amount of money or the interest rate. The instruments of monetary policy are:

• Open Market Operations
• Permanent Financing Facilities:
  • Marginal credit facilities
  • Deposit facilities
• Minimum Reserves

The long-term aim of monetary policy instruments is price stability, while the short-term goal is to provide liquidity and adjust interest rates in the short term.